Yellen Looks Likely To Stick With Treasury Department Policy Regarding Bitcoin

Thom Thompson

Thom Thompson

Editor

President-elect Joe Biden’s Treasury Secretary nominee, Janet Yellen, upset the cryptoverse yesterday with her response to a senator’s question about terrorism during her Senate Finance Committee confirmation hearing. With regard to terrorist financing, she said, cryptocurrencies “are a particular concern.” 

At the hearing Yellen said, “I think many are used, at least in a transaction sense, mainly for illicit financing.” Rapid-fire tweets were then sent out quoting Chainalysis’s year-old study that found less than $10 billion in bitcoin transactions used for illicit purposes, or insisting rhetorically that Yellen be at least as concerned about the U.S. dollar’s use in supporting terrorism. 

She might have been singing out of current Treasury Secretary Steven Mnuchin’s hymnbook. In mid-December, the Financial Crimes Enforcement Network published a proposed rule change that many people seem to think reflects Yellen’s predecessor’s deep worries about terrorism financing. 

The proposal would extend currency transaction reporting requirements for their transactions in bitcoin, Ether, Monero, etc. to the licensed “money service businesses” that are the backbone of cryptocurrency trading in the U.S. Even more controversially, Treasury would ask these businesses to gather and record information on smaller transactions, anything at a value of $3,000 or more.  

Most upsetting of all seems to be the proposal that trading platforms like Coinbase, Kraken and ErisX and other custodians which host customers’ wallets would have to track down, record and retain identity information for the owners of wallets that receive funds from the platforms – that is, when a customer transfers out of the hosted wallet to a private “unhosted” wallet, including  when the owner of the wallet is not known to the platform. Treasury’s notice itself identified this aspect of its plan as being the most difficult and most costly for the platforms to address.  

Treasury rubbed salt, vinegar and battery acid in the industry’s sores by providing only a 15-day public comment period instead of the more usual 60 days. In the notice Treasury says it had been holding a dialogue about the proposal with industry participants for the past year to justify the foreshortened comment period. Inadvertently supporting Treasury’s point that there had been significant, if informal, notice of the proposal to affected parties, one trade group, Coin Center, published its 34-page footnoted comment letter a week into the comment period. Six pages of the letter were complaints about the notice period.

It is widely rumored that Mnuchin was behind this initiative. Coming at the end of his term, it is thought that Mnuchin did want to let cryptocurrencies’ role in international crime be overlooked. 

At any rate, the department said that significant national security imperatives called for it to act quickly and efficiently, noting that criminals are increasingly [emphasis added] using cryptocurrencies in international terrorist financing, weapons transfers, and evading international sanctions. While the footnotes in Treasury’s document refer to publicly available sources regarding cryptocurrency crime data, it is impossible to argue with the department’s assertion that the use of cryptocurrencies in crimes is not increasing. The public just cannot know whether that statement is true or not. 

The Treasury Department also leaned on the international nature of the illicit activities as a justification for accelerating its rulemaking. Almost as if on cue, European Central Bank President Christine Lagarde pointed to “funny business” with bitcoin during an interview at  a Reuters virtual conference week. She  called for regulation of bitcoin and other cryptocurrencies on a globally agreed basis.

As of January 18 there have been 7,552 comments on the proposed rules. The department extended the original comment period for an additional 15 days for the aspects of the proposal that concern currency transaction reporting and 45 days for the most controversial parts about collecting and recording identity information for non-customer wallets and related issues. 

In the relatively few comments (maybe 100, including some from trade associations, exchanges, and members of the public) that I have read so far, commenters mostly ignore the concerns about crime that Treasury raised. Many of the letters complain that the proposed regulations would be costly, burdensome, and deleterious to something like “American leadership in payments technology.” 

Most of the letters spend time instructing the Treasury Department on how it has violated the U.S. Administrative Procedures Act. Another thread in the batch of letters was a complaint that cryptocurrency should be regulated just the same as cash. The notice includes 24 questions to the industry regarding operations but in most letters that I have seen, the questions are ignored. 

Given the provenance of the rulemaking, it will be interesting to see how Yellen’s Treasury proceeds from here. The extra 45 days of comment allow them some breathing room. Yellen, who otherwise has publicly concerned herself very little with cryptocurrencies, did point to them voluntarily in conjunction with technology and terrorism financing. There probably is a hint in there that she will at least start from the same page of the hymnal that Mnuchin has left open. 

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